10 - Solutions : downstream own dam, rights to...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
02:20 No market for water: no property rights     Agents w/ access will take up as much as possible (upstream have first access) Leads to shortage for downstream firms Major issue for developing countries Solution: create market so first firm can sell units of water Protective Watersheds     : for drinking water, leaves other rivers v. polluted Diverting water from one river to another     First come first serve: Upstream takes max demand Cost of diverting = difference between willingness to pay (WTP) under FCFS system Cost of diverting + WTS 2  = WTB 1 Dam:     Dam owners won’t buy any water Inefficiency     : total value of water increases, but dam not using water/ water still  reaches downstream firm
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Solutions : downstream own dam, rights to dam-generated electricity, tax Tax solution : introduce a tax that = difference between downstream and downstream with dam (the dam-generated electricity/ added value of dam) Internalize externality of dam PSet 7 Agents use up to their max demand if possible What would be the price of water if it was traded? Sum demand function and equate to supply How would the water be allocated by a market? Substitute found price into demand functions What is the welfare gain associated with moving from first come first serve to the market allocation? Calculate area beneath demand function up to allocation Compare difference: market allocation yields more social welfare than first come, first serve. 02:20 02:20...
View Full Document

This note was uploaded on 01/26/2010 for the course ECON 330 at Yale.

Page1 / 4

10 - Solutions : downstream own dam, rights to...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online